A federal judge in Florida has thrown out a lawsuit accusing the U.S. Securities and Exchange Commission of negligence for failing to report that the now-imprisoned swindler Allen Stanford was running a $7.2 billion Ponzi scheme.
U.S. District Judge Robert Scola in Miami said the market regulator was shielded under an exception to the Federal Tort Claims Act that bars claims arising from misrepresentation or deceit.
The plaintiffs, Carlos Zelaya and George Glantz, said they lost a combined $1.65 million with Stanford, and sought class-action status on behalf of investors who were victims of his fraud. They plan to appeal Monday's decision, their lawyer Gaytri Kachroo said. SEC spokesman Kevin Callahan declined to comment.
Stanford, 63, is serving a 110-year prison sentence after he was convicted on criminal charges in March 2012 for a fraud that the government said was centered in certificates of deposit issued by his Antigua-based Stanford International Bank.
Zelaya and Glantz claimed that the SEC considered Stanford's business a fraud after each of four examinations between 1997 and 2004, but failed to advise the Securities Investor Protection Corp, which compensates victims of failed brokerages.
The SEC filed civil charges against Stanford in February 2009, two months after the multibillion-dollar Ponzi scheme of New York-based swindler Bernard Madoff was uncovered. In a typical Ponzi scheme, investors are promised high or consistent returns relative to the amount of risk taken, and older investors are paid with money from newer investors.
Last September, Scola let the lawsuit against the SEC go forward, saying the plaintiffs could argue that the regulator had breached a duty to report Stanford's misconduct.
But on Monday, he said the FTCA exception barring claims of misrepresentation deprived him of jurisdiction.
"The plaintiffs claim that they were induced into entering disadvantageous business transactions because of the SEC's misrepresentation," he wrote. "The plaintiffs' cause of action is a classic claim for misrepresentation."
Their lawyer Kachroo said: "We believe that the judge did not draw the appropriate distinction between a claim based on a misrepresentation and our claim based on a failure to warn in line with the SEC's mandatory duty to notify SIPC."
In 2010, the SEC's inspector general criticized the regulator, finding that it knew as early as 1997 that Stanford was likely running a Ponzi scheme.
Earlier this year, federal appeals courts in New York and California dismissed lawsuits against the SEC by victims of Madoff's fraud.
The case is Zelaya et al. v. U.S., U.S. District Court, Southern District of Florida, No. 11-62644.